Transcript Episode 117 – The Nonprofit Audit How to Set Yourself Up for Success on The Prosperous Nonprofit
Stephanie Skryzowski: [00:00:00] Hey there. If you’re looking for the 100 degrees of entrepreneurship podcast, you’re in the right place after a hundred amazing episodes, we’re changing things up to serve you the most inspiring content in a fresh new way. Thanks for being here and keep listening.
Welcome to the prosperous nonprofit, the podcast for leaders who are building financially sustainable and impactful nonprofits and changing the world. I’m Stephanie Kowski, a Chief financial Officer and founder and c e o of 100 Degrees Consulting. My personal mission is to empower leaders to better understand their numbers, to grow their impact and their income.
On this show, we talk to people who are leading the nonprofit sector in new, innovative, disruptive, and entrepreneurial ways, creating organizations that fuel their lives, their hearts, and their communities. Let’s dive in.[00:01:00]
Hey everybody. Welcome back to the prosperous nonprofit. I’m excited to be here with you today talking about the audit. Now, if you saw the word audit in the title of this episode and you are still listening, first of all, props to you. Thank you for being here because you know how important the nonprofit audit is, and I’m so happy that you’re here to learn a little bit more about how to really ace your audit.
Now, if you just started listening to this episode and you didn’t realize that we were talking about audits, stick with me. I promise this is not gonna be boring. This is not gonna be scary. I’m gonna give you some real practical pointers to maximize your audit and really get the most out of it. Cause after all, we are paying a lot of money for these financial statement audits, so let’s use them to the best of our ability, right?
So I’m talking to you about this right now because it is super relevant in my life. We have a lot of clients whose fiscal [00:02:00] year end is December 31st, and so their audit typically begins in Q1 or q2. And so kind of wrapping up a lot of audits right now and for our clients that have a June 30th, Fiscal year end, they are just diving into the preparation stages of their audit.
So no matter when your fiscal year end is, no matter what time of year your audit is, this is a fantastic episode to listen to, to really sort of shift the way that you think about audits from being this. Big scary thing to being something that’s really useful and a second set of eyes and a way to really put out your best financial statements out into the world.
So now, if you are a business owner that’s listening because you are enjoying the prosperous nonprofit podcast, I will say this episode is probably not going to be as relevant for you because your business is probably not gonna go through an audit and it’s. Certainly not mandatory like [00:03:00] it is for many of our nonprofit listeners.
So if you wanna catch us next week, that’s fine, but nonprofit leaders stay here. Okay, so the first thing I wanna talk about is who needs an audit? Now, this is one of the first questions that we always ask potential new clients. At a hundred Degrees Consulting. We ask, Hey, do you have an audit? And for many clients who’ve never had one before, they’re often asking us, well, ooh, I don’t know.
Do I need one? And so I have a little secret resource that I go to when I want to know if an organization needs an audit. So the first place I look is, does their state, the state in which they’re registered and incorporated, does their state require an audit? So that’s always my sort of criteria, number one, and my favorite place to go.
To find a very comprehensive list of all of the state law nonprofit audit requirements is council of nonprofits.org, so council of nonprofits.org, [00:04:00] and I just search state nonprofit audit and you’ll find the page. And if you scroll down, Every single state is listed along with their audit requirements and the link to their state code, like the, you know, the, the laws that are written to determine whether or not you need an audit.
So, for example, Alabama, there is no state law requirement for an audit. Arizona, no requirements. Now, Arkansas, a nonprofit that has gross annual revenue, over 500,000. Must have audited financial statements. California, that gross annual revenue number is 2 million. So it’s different for every single state, which, you know, of course, makes it super fun and super easy to keep track of, especially when you’re like us and we have a lot of clients in a lot of different states.
But if you wanna know your state, pop over to council of nonprofits.org and just search for state nonprofit audit requirements and you’ll find that that page that I’m talking about. So that’s [00:05:00] always step one if you have not already had an audit. Go check with your state and make sure that you don’t need one.
Now, the other thing to think about is whether or not you need an audit is thinking about your funders. Do any of your funders require an audit? Many foundations, government agencies do require audited financials. When you. Even apply for the grant, or maybe you got the grant but you want to renew it.
Maybe they’re going to require audited financials. So that’s another sort of criteria to think about when you’re like, okay, do I need an audit or not? And of course, if you are spending federal government money here in the us, Over $750,000 in a year. You definitely do need an audit. In fact, they’re probably not gonna give you any more money if you have not had that audit.
So that’s kind of the basis. Okay. Do we need an audit now? Once you’ve decided, yes, we do need an audit. I wanna just talk [00:06:00] right now about the fear and the discomfort around the audit. Now I’ve gone through, Dozens if I add ’em all up. Oh gosh. Maybe hundreds of audits at this point, um, throughout the course of my career, and I really used to think of the audit as this scary, like pit in my stomach kind of time where I was just so afraid that I had messed something up throughout the year.
I was so afraid that they were going to catch a mistake. I was so afraid that I had. You know, accidentally had incorrect financial statements or something. I was really scared a about it and I was really upset whenever they would, you know, give us a suggestion on the management letter, Hey, implement this policy, or, Hey, here’s something you could do better.
But I have since shifted my perspective instead of, you know, approaching the audit with fear, I really think about the audit as an opportunity. [00:07:00] It is an opportunity to sharpen our skills and to put out the most accurate, most representative financial statements out into the world. Right? It is an opportunity to learn and grow.
These CPAs are on top of every single new tax and accounting. Requirement and law for nonprofits, and it is an opportunity for me to learn, so then I can implement that in my organization and in, you know, my clients’ organizations for example. So I want you to think about that as the audit is an opportunity.
After all, we are paying likely tens of thousands of dollars for this audit. So let’s make the most of it. Let’s not just go into it with absolute dread, which I know many of you may, and I feel you. Let’s think of it as an opportunity. Think about this too. Audit is a best practice, right? You’re getting a second set of eyes coming in and looking at your numbers and really verifying that you are using [00:08:00] your resources as efficiently as possible.
So when you have those audited financial statements in hand, you will gain the credibility and the confidence of funders by promoting. Financial transparency, right? So your organization is more transparent because you’re putting your audited financials on your website with the, you know, sort of seal of approval of an outside firm that is only going to help you gain credibility and confidence of your funders.
So the second reason why this is a best practice. Now, Your organization might be eligible for new and different sources of funding. Right? So a lot of funders will say, you need audited financials to submit with your application. And if you don’t have them. Then you can’t submit the application and therefore you cannot get access to that money.
But now that you have audited financials, this opens a lot of new doors and [00:09:00] some of the charity watchdog organizations like Charity Navigator and GuideStar. Or candid. They require, not require, but they, um, sort of give you more points, um, and weigh heavily on if you have audited financial statements. And so if you do, they’re going to rate you higher. Which again gives you more credibility with any funders that are perhaps looking at your profiles on those sites.
Okay. And finally, why the audit is a best practice. Is because, like I said, it’s an opportunity to do a deep dive into your policies, into your procedures, into the way that you are recording your revenue and your expenses really to ensure that you’re using your limited resources most efficiently. So I’m a big fan of it from that perspective.
So I hope this, you know, causes just a little shift in your mind that, listen, the audit is not all that. Bad, right? The audit is a really great opportunity to improve as an organization.[00:10:00]
Hey there. If you want our handy PDF guide to have a stress free audit, go to 100 degrees consulting.com/stress free audit. You’ll find all of the links that we talked about in today’s episode, as well as a whole bunch of tips and more everything we talked about. So go to a hundred degrees consulting.com/stress free audit.
So now that you are. Ready for your audit. You’re kind of excited about it, maybe a little bit nervous. Um, you need to find an auditor, right? So this cannot just be, um, your bookkeeper, right? This needs to be a c p a firm. This needs to be a professional, licensed accounting firm, right? Your, even if you have an external bookkeeper, they cannot do your audit for you.
So you need to find. A licensed c p a firm. Now, a couple things to [00:11:00] think about. I always recommend for a professional service like this, I always recommend getting referrals. Get recommendations from other nonprofits that you know that have an audit and really like their auditor. Give them a call. Get referrals if you need some.
Reach out to me. I have several. Audit firms that we really like working with. And obviously we work with a lot because we have a lot of clients, so we get a pretty broad perspective, which is really nice. And we have a number of firms that we love working with. So definitely start with getting referrals.
If you know nobody, if you don’t know a single person in the nonprofit sector, um, that you can ask for audit firm referrals. When you’re looking around, if you’re taken to Google to look for an audit firm, really find one that specializes in nonprofits and I cannot. Emphasize this enough. Every single time I have talked to, [00:12:00] usually it’s like a potential client that’s thinking about working with us for their bookkeeping and their CFO services.
When I ask them about their auditor, if they are having a like not great experience, or it’s taking their auditor a really long time, or they’re feeling like the process is just not helpful, almost every single time. The audit firm does not specialize in nonprofits. Like can they do a nonprofit audit? Yes.
Are they licensed to do so? Sure. But they don’t specialize in nonprofits. And so there are pieces of the way that we work that they just don’t understand because it’s not their specialty. So they shouldn’t be expected to. Right. So I can’t emphasize enough finding an audit firm that specializes in nonprofits and all of the ones that I would recommend to you absolutely do specialize in nonprofits.
So that is the first thing. The second thing to think about is wanting someone that you really connect. Well with, so I say this because the audit [00:13:00] relationship, the audit client relationship at you as the nonprofit, you’re the client, should not be just a one and done where we talk to each other for like a month out of the year during the audit, and then we don’t speak to each other again for, you know, 365 days or 335 days, right?
Until the next audit begins. We should be in regular communication with our auditors throughout the year. So let me give you an example. I, um, with one client that I work with, they received a very, very large gift. Like multiple seven figures at the end of the fiscal year. I had read through the entire grant agreement. And was kind of stumped on how to book the grant, basically how to recognize the revenue.
I didn’t quite understand the language and how to interpret it. If I should book the entire thing, if I should recognize. All of the revenue when the grant was signed or if I should defer some of it. And it was a lot of money. [00:14:00] And so that would have materially changed the financial statements, And so instead of guessing or instead of Googling. do you know what I did?
I asked their auditor. I sent the grant agreement over and um, emailed it to the auditor, I said, Hey, how would you book this? I’m like, I’m kinda getting lost in this language and I’m not sure how to interpret it. He went through. He read the entire grant agreement and he’s like, okay, based on blah, blah, blah. here’s what I’m thinking.
You know what? That avoided like a lengthy conversation that would potentially slow down the audit. And it would also avoid a potential very, very large adjusting journal entry if I hadn’t gotten it right the first time. Right. And that’s not what we want. We don’t want to report, say, you know, Hey, our revenue for the year was 10 million to the board, and then have an audit adjustment That’s.
Hey, just kidding. The revenue for the year was actually only 6 million, right? Like that’s not a good feeling. So anyway, long story [00:15:00] short, communicate with your auditor throughout the year. It’s so much better to ask quick questions here and there than to have a bunch of adjusting journal entries because you just guessed on the right thing to do.
Okay. Whew. So we want to make sure that not only does our audit firms specialize in nonprofits, but we really connect well with them because we are gonna be communicating throughout the year. We also wanna make sure that their firm culture really meshes well with ours, because hopefully they will be meeting with your board with the audit and or finance committee depending on what committee you have on your board.
And so we wanna make sure that they’re, they’re really gonna understand how to communicate with your board as well, so, Maybe you’ve gotten some referrals, maybe you’ve also found a couple firms online that look really good. We definitely wanna do an R F P A request for proposals, We wanna do this process to make sure we’re doing the appropriate due diligence and we’re sort of comparing apples to apples, right?
We wanna make sure that we’re getting the same information from a [00:16:00] number of firms so we can make the best decision for our organization. So I’m not gonna go through like the whole R F P process, but basically we first want to. Figure out. All right, well, who’s gonna make the decision? Likely the final decision is likely going to come from your, your boards, your audit, or your finance committee.
And, you know, maybe somebody on the team, your ED or somebody on the finance team, is gonna be doing the legwork to collect the RFPs and kind of summarize information. Um, so figure out who’s gonna be involved. And then think about maybe, as you know, this sort of committee of stakeholders, think about what are you looking for in an audit firm, right?
What size firm do you want? Do you want a big firm that has hundreds and hundreds of accountants, or do you want a small firm that’s, you know, maybe two people? There’s no right or wrong. I can see advantages for both, right? But really think about that big or small firm. What’s their expertise? How many staff will work on the engagement?
What’s their turnaround time for the audit? What’s their response time? [00:17:00] When is their busy season? Because let me tell you, it is very tricky to be a first time client in a large firm. During their busy season, it is very difficult no matter how wonderful the firm is to get priority and feel like things are moving along as fast as you want them.
What is the cost that is, you know, that is really important? And are they available when you want them to start? Right? So you may be ready, if you have a December 31st year end, you may be ready to start. All right, February 1st, let’s do this. We want to have everything wrapped up by April. Um, they might not be able to start, then.
They might not be able to fit you into their schedule. So think about that as well and include that in the R F P. Then think about, you know, we’ve already sort of made our list of who we’re sending the RFP to and hopefully we’ve gotten some referrals from, you know, your colleagues, your peers, your board members, and maybe some research that you’ve done as well.
And then once those RFPs come back, that really can help you make the decision. I recommend speaking, not just [00:18:00] choosing based on the proposal, not that you would do that, but speaking to at least two or three auditors. So again, you can really get a sense of like, Hey, am I gonna enjoy working with this person, like pretty heavily for.
A month or two and then, you know, communicating with them throughout the year. I think that will tell you a lot about the right firm for you. So now you have an audit firm, you know that you need an audit, you have an audit firm. And you’re ready to dive in. So I like to think about the audit year round.
That’s a really weird thing to say. I’m sorry. But I do think about the audit year round. Because I’m always thinking about, okay, what can I do now in say, April that’s going to make the audit next year? Even easier. And so little things that I’m thinking about are like, okay, well I have to, you know, post this journal entry to adjust the grant revenue because the funder decided to, you know, add [00:19:00] $30,000 to this grant.
Okay, great. Well, when I post that entry, why don’t I also post the like grant agreement amendment to it. So when I look back at that transaction, I can see, oh, exactly. This is exactly what that’s for. Right? So little things like that, or, you know, when I think about organizing my folders in Google Drive, all right. What is gonna be most easy for me to pull when the auditor says, all right, pull all of your credit card transactions from March of last year.
Great. I go into the folder and they’re already there, right? So think about that in advance. I literally think about that all throughout the year. Before you go, I just wanna thank you for being here. To access our show notes and bonus content, visit 100 degrees podcast.com. That’s 100 degrees podcast.com, and I’ll see you next time.